Landed Cost in eCommerce - Definition & Calculation Formula

When you run an eCommerce business, you have to know exactly how much every item costs. Unfortunately, this isn’t always easy, especially when the cost of getting products to their destinations varies with each and every product. This is why landed cost is such an important concept for eCommerce business owners to understand and use when calculating expenses and profits.

But what does landed cost mean? How does landed cost affect eCommerce businesses? How is it calculated? Is there a specific formula? Finally, where can you find high-quality bookkeeping software to calculate landed cost for you?

In today’s guide, we will answer all of these questions and more, but first, let’s look at the definition of landed cost to better understand the concept:

What Is Landed Cost?

In layman’s terms, landed cost simply means the total cost of a product once it has arrived at its destination. For eCommerce businesses, this typically refers to all of the costs the business incurs to procure and ship a product to the customer. Naturally, the meaning of landed cost may seem quite broad at first glance, as it encompasses a wide range of expenses, from manufacturing costs to storage and shipping (and everything in between).

Due to the complexity of calculating landed cost manually, some small to mid-sized eCommerce businesses forego the calculations and simply rely on approximations. It goes without saying that this is a very risky method, as it makes it virtually impossible to know the profitability of your business. For this reason, it is best to take the time to figure out your landed cost and then automate the calculation process.

That said, some businesses may find landed cost calculations easier than others. For instance, if your eCommerce business sells directly from a single website, uses drop shipping or a 3PL warehouse, and only sells within a specific country, region, or state, it may greatly simplify the landed cost formula you’ll need to use. On the other hand, if you operate through multiple selling platforms like Amazon, eBay along with Shopify or BigCommerce, you sell products outside of the country, and you manage your own shipping and transportation costs, then the calculations will be far more complex and difficult to track.

Why Calculating Landed Cost Is Important

Landed cost isn’t just one more way to look at your expenses; it allows you to calculate the total amount you’re spending on products. Having an accurate calculation of your total investment in products allows you to compare your expenses to your revenue and analyze your business profits.

Ideally, eCommerce businesses should be calculating landed cost before shipping any products. In doing so, you can ensure that you’re not spending more than you’re earning or overestimating your profits. Naturally, you may find that the actual landed cost differs from your initial estimates, which is why it is important to check the numbers again after you’ve shipped your products.

Landed cost doesn’t just affect your ability to analyze the relationship between revenue, expenses, and profits. Since landed cost includes all fees and costs along the supply chain, it helps you understand exactly where you’re money is going. This, in turn, can help you better manage your business. Landed cost is particularly crucial for the following:

• Pricing - As an eCommerce business, you always have to find a balance between competitive pricing and profitability. If your price points are too low, you’re simply not making enough revenue to justify the costs. Alternatively, if your prices are too high, you’ll almost certainly lose customers to your competitors. Landed cost helps you understand exactly how much room you have to change your pricing model to remain both competitive and profitable.
• Overhead Planning - Your overhead expenses all contribute to your landed cost. When you see how much your expenses eat into your profits, you may decide to take a second look at exactly what your business really needs. You may find that cutting overhead costs now is the best way to increase profits and actually grow your business for the future.
• Ordering - A large percentage of eCommerce businesses do not manufacture their own products. Instead, they order them directly from manufacturers or wholesale retailers. Either way, your landed cost will help you determine how much of a given product you can afford to order, including all associated fees, taxes, and freight charges.
• Shipping Management - Shipping costs are just one piece of the landed cost puzzle, but they also happen to be a particularly important piece. Many eCommerce businesses benefit from having relatively low overhead when compared to a traditional brick-and-mortar business. Shipping is the one major exception. Every eCommerce business that ships physical products has to manage shipping costs in one way or another. By analyzing your landed cost over the long term, you can make better and more cost-efficient decisions related to how you ship your products.

Landed Cost Vs FOB Vs COGS

It is very common for eCommerce businesses to rely on data like Freight on Board (FOB) or Cost of Goods Sold (COGS), but these don’t provide a complete picture of your total investment in products. In the context of an eCommerce buyer, FOB cost simply refers to the amount you pay to acquire products. COGS is a bit more thorough, as it includes all of the direct costs related to creating or acquiring products, including raw materials, labor, and overhead costs.

Landed cost incorporates and expands on these two figures by including all costs related to shipping the product to consumers. Consequently, landed cost is by far the most comprehensive and accurate way to determine how much each product costs your business.

The Total Landed Cost Formula

As can be expected, there is no one-size-fits-all landed cost formula. The factors that need to be included will vary from one business to the next. For example, if you need to learn how to calculate the landed cost of imported goods from China, your calculations will require you to consider dozens of different factors. That said, eCommerce businesses can generally expect to include some or all of the following costs in their calculations:

• Manufacturing or acquiring products (including customs and import costs)
• Shipping products to consumers
• Overhead (including labor and payment processing)
• Taxes and fees
• Insurance and compliance

The total sum of these costs added together will give you your landed cost. To have a better visual of the landed cost formula, here is an example:

Cost of product + shipping + overhead + taxes + insurance/compliance = fully landed cost

How To Calculate Landed Cost

Oftentimes, the hardest part of determining landed cost is calculating the percentage of larger expenses to attribute to a single product. For example, let’s say that you incur $1,000 per month in overhead for your business. How much of that $1,000 should be used to calculate the landed cost of a single product? This is one of the main reasons that calculating landed cost manually is simply not a worthwhile option. It is better to automate the process with a landed cost calculator or high-quality landed cost software.

Nonetheless, we will still look at a landed cost example using some common variables:

• Product: $15 per unit
• Shipping: $5 per unit
• Payment Processing: $1 per unit
• Taxes: $2 per unit
• Insurance: $3 per unit

By adding all of these amounts together, we get $26. This is the total landed cost for each product. In other words, you will need to charge more than $26 per unit to make a profit.

Use ConnectBooks to Automatically Calculate Your Landed Cost

Trying to do your own landed cost calculations in Excel is tedious, and hiring an accountant can be expensive. If you want a fast and easy way to automatically calculate your landed cost across multiple selling platforms, you can’t go wrong with ConnectBooks. ConnectBooks syncs all of your selling channels and automatically calculates your landed cost per product with the click of a button. To get an even better grasp of your business finances, ConnectBooks also generates accurate profit and loss statements, inventory tracking data, and much more.

Are you in need of comprehensive solutions to calculate landed cost in eCommerce? Do you want to learn more about managing all of your eCommerce channels in one place? If so, reach out to the experts at ConnectBooks for more information!

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